Carbon Markets

Putting a price on carbon is essential to drive the technological and behavioural innovation necessary to limit climate change. Market-based instruments, such as cap-and-trade emission trading schemes, are crucial to price carbon emissions and keep the costs of climate action low. A cap-and-trade scheme enables emitters to trade allowances for the right to emit up to their allowed limit or "cap".

OECD works with governments on the design and implementation of GHG market instruments such as cap-and-trade. Our analysis extends to broader environmental markets, encompassing local air pollutants as well as renewable energy credits, and includes both voluntary and compliance markets; it also considers how offset markets can broaden the range of options by which countries with capped GHG emissions can reach their targets and lower the costs of GHG mitigation. OECD work also extends to examining fund- or market-based mechanisms for Reducing Emissions from Deforestation and Forest Degradation (REDD) in developing countries.

The OECD provides the fora to discuss such issues amongst member and non-member countries, for example, through the Climate Change Expert Group. It also conducts a unique “peer review” process of national policy performance, including the use of market instruments.

The objective of OECD work on project-based mechanisms is to assess progress with, and design options for, the Clean Development Mechanism (CDM) and Joint Implementation (JI), and to explore opportunities for scaling up these mechanisms.

Emissions Trading (ET) The objective of OECD work on emission trading is to develop a practical implementation framework, or options, for an international greenhouse gas emission trading system.

REDD and Markets The objective of OECD work on Reducing Emissions from Deforestation and Forest Degradation in developing countries is to assess and evaluate potential positive incentives, policy approaches and financing mechanisms that aim to contribute to global climate change mitigation.

Scaling-up Market Mechanisms OECD work on scaling-up market mechanisms explores essential elements of market “readiness”, possible options for sectoral approaches, and how to build on expertise gained in voluntary markets in moving towards a compliance market.

Environmental policy and technological innovation As part of its work on decoupling environmental pressures from economic growth, the OECD is examining the effects of public policy on technological innovation with the aim of improving the design, implementation and evaluation of environmental policies.

The OECD is developing a Green Growth Strategy to show the way to make a cleaner low-carbon economy compatible with growth. As governments move forward on addressing major environmental externalities, the additional revenues generated by carbon taxes and by auctioning tradable emission permits could imply an increasingly important role for these taxes in government budgets.

OECD and CDC Climat Recherche have reviewed ten in-depth case studies of urban projects proposed and operating within the realm of Joint Implementation (JI) and the Clean Development Mechanism (CDM) of the Kyoto Protocol. They examine drivers of success and how to best tap the potential for carbon markets to offer increased levels of financial support for urban mitigation projects.Cities and Carbon Market Finance (full report)

Latest analysis:Market Readiness: Building blocks for market approaches Market-based mechanisms offer a number of advantages to other regulatory approaches for GHG mitigation such as technology or performance standards and feed-in tariffs. This paper examines essential elements of “market readiness” for possible new mechanisms and highlights some of the past and new market readiness activities, of use as Parties consider decisions on future market approaches.